How to refinance an investment property, and what changes when it is a rental

What changes when the loan is on a rental

The process is the same process. Your existing loan is reviewed, the market is compared against it, one lender is applied to, and the old mortgage is discharged when the new one settles.

What changes is the evidence, the arithmetic and the purpose of the money. Any one of those could change the answer on its own.

• The tenancy has to be documented as well as your income, because part of the servicing rests on the rent
• Rental income is counted at a discount rather than in full, and how hard it is shaded varies from one credit policy to the next
• Every other loan you hold counts as a commitment, commonly assessed at a notional rate above the one you actually pay
• Investment lending is priced separately from owner-occupier lending by many lenders, and interest only is priced separately again
• What the borrowed money is used for, rather than what secures it, is what the tax treatment turns on
• The valuation is done on a tenanted property, and the lease in place is part of what the valuer is looking at

None of that makes an investment refinance harder to do. It does mean the question of whether switching is worth it gets answered differently, and that comparing your rate against a friend's owner-occupier rate tells you nothing useful.

What a lender asks for on an investment refinance

An investment refinance needs everything an owner-occupier refinance needs, plus a file on the property itself. Gathering it before anything is lodged is the cheapest thing anybody could do to keep the application moving.

• Identification for every borrower, certified where the incoming lender asks for it
• Evidence of your personal income, in whatever form your employment or self-employment takes
• The current lease or tenancy agreement for the property, or a rental appraisal where it sits vacant
• Recent statements from the managing agent showing the rent actually received
• A current landlord insurance certificate, and the building policy where the property is strata titled
• Statements for the existing loan, including every split, offset or line of credit attached to it
• Rates notices, water notices and strata levies, which a lender counts as holding costs
• Statements for every other property loan you hold, not only the one being moved

That last one catches people with more than one property. A lender assessing a refinance assesses your whole position, so a loan you were not planning to mention is a loan the file stalls on later.

How the file is assessed the second time round

Refinancing is a fresh credit application rather than an administrative transfer. Your income, your commitments and the property are all looked at again, against the incoming lender's current policy and your position today.

That is straightforward when nothing has changed and awkward when something has. An interest-only period that has since expired, a car loan taken on, a rent that has not moved in years, or a valuation landing under what you expected could each change what a lender is prepared to advance.

The condition of the property carries more weight here than investors expect. A place that is run down, part way through a renovation or hard to let narrows the list of lenders prepared to hold it as security, and the valuer's comments on condition reach the lender alongside the figure.

What varies most between lenders

• The proportion of gross rent counted towards servicing
• Whether a signed lease is required, or a rental appraisal is accepted
• How short-term and holiday letting income is treated, which is commonly much harder
• The notional rate existing loans are assessed at, including the ones held elsewhere
• How negative gearing is handled inside the servicing calculation
• Limits on total exposure to a single borrower, which start to bite once a portfolio has a few properties in it

This is why the same investor, with the same rent and the same salary, gets materially different answers from different lenders. Choosing where the file goes before it is lodged is most of the work. Applications fired off to several lenders at once do damage rather than create options.

Purpose, deductibility, and why we send you to your accountant

The general principle is that tax treatment follows what borrowed money is used for, not what property secures it. Borrowing against a rental to fund something private is treated differently from borrowing the same amount to fund another investment.

That is a mechanism described in general terms rather than advice about you. We do not give tax advice, and nothing here is a ruling on your position. How your circumstances are treated is a question for your accountant, and it is worth asking before the loans are set up rather than afterwards.

One lending habit is worth knowing about, because it makes an accountant's job harder. Where new borrowing is drawn into the same account as an existing balance, the purposes are mixed together in one facility, and separating them afterwards becomes somebody's problem.

The usual answer is to keep new borrowing in its own split with its own account, so each purpose has its own paper trail. Whether that suits you is your accountant's call. Setting the lending up that way is ours.

The traps investors fall into

Most of what goes wrong in an investment refinance is not the lender's doing. It is a comparison made against the wrong number, or a switch made at the wrong moment.

The introductory rate

A rate that applies for an opening period and then reverts is not the rate you are refinancing to. It is the rate you hold for a while. Compare the ongoing rate and the fees attached to the product, because that is what the loan costs for most of its life.

Cashbacks and other hooks

An upfront incentive is real money, and it is also an efficient way to make an ordinary product look sharp. Set it against the ongoing rate over the years you expect to hold the loan and see whether it still wins. Sometimes it does, which is exactly why it needs costing rather than dismissing.

Expecting the tax treatment to rescue a poor loan

Investors sometimes talk themselves into a switch on the strength of what they assume the deductions do. Deductibility reduces the cost of interest, it does not remove it, and the extent of it depends entirely on your own circumstances. Ask your accountant what your position actually looks like before it becomes the reason for a decision.

Refinancing too soon, and too often

Every application is a credit enquiry on your file, and a run of them reads badly to the next lender. Switching costs also have to be earned back before you are ahead, and restarting that clock shortly after the last switch rarely works out.

Using up the lender you needed for the next purchase

Lenders limit their total exposure to one borrower, and the policies that suit an investor are not evenly spread across the market. Moving the existing loan to the lender best placed to fund your next purchase could leave you with nowhere to take that purchase. Where a purchase is close, the order of the two is a decision worth making deliberately.

Cross-securitising without noticing

Where one loan is secured over more than one property, those properties are tied together whenever you sell or borrow again. A refinance is the natural point to separate them, and it is also a point at which they get tied together without much being said about it. Ask what is securing what, in plain terms, before you sign anything.

Working out whether the switch is worth it

The test is simple to state and takes real numbers to answer. The improvement has to be worth more than the cost of moving, over the period you actually intend to hold the loan.

It is worth running that test periodically rather than only when something prompts you. Many lenders price new business more sharply than the loans already sitting on their books, so a loan written years ago could have drifted above what the same lender offers today without anything about you or the property having changed.

1. 1

   Establish exactly what you have now

   The rate, the fees attached to the product, the term remaining, the repayment type, and whether any part of it is fixed. Nothing can be compared against a loan nobody has written down properly.

2. 2

   Ask your own lender for a review

   It costs a phone call and it occasionally ends the exercise. A better rate where you already are avoids the switching costs entirely, which is a result rather than a wasted step.

3. 3

   Cost the switch in full

   Discharge and settlement fees on the way out, government fees to discharge the old mortgage and register the new one, and application, valuation or settlement fees on the way in. Break costs apply where a fixed term is being exited early, and lenders mortgage insurance does not transfer with you.

4. 4

   Re-run the servicing across everything you hold

   Not the loan being moved on its own. Every property loan, every card limit and every other commitment counts, and the rent is counted at a discount rather than in full.

5. 5

   Check it against what you plan to buy next

   If a purchase is on the horizon, which lender ends up holding this loan matters as much as the rate written on it. Sequencing the two now is easier than unpicking them later.

6. 6

   Settle the structure with your accountant, then apply once

   Splits, repayment type and which security stands behind which loan are decided before anything is lodged. Then the file goes to one lender rather than to several.

If the improvement does not cover the cost of moving within the period you plan to hold the loan, the honest answer is to stay where you are. Any switch is subject to lender approval and to your circumstances, and nobody could guarantee an outcome before a lender has assessed the file.

How long the switch then takes is a separate question, and an honest answer to it arrives without a number attached. The discharge from the lender you are leaving is the stage that most often sets the pace.